September 11, 2019
Rent control is causing angst for apartment investors and lenders across the U.S. New research by Real Capital Analytics (RCA) shows new demands for rent control are repricing assets in a way that may lead to loan defaults and lower housing availability over the long run.
In 10 out of the 12 regulated markets studied by RCA, apartment cap rates have increased over the last year: an 83% share. In the remaining markets, only 19 out of 46 markets have seen cap rate increases: a 41% share.
RCA’s CRE economist Jim Costello says, “California is arguably the world’s most dynamic, inventive economy. So many people have wanted to move there to participate in the success of California that there are not enough housing units to go around. Too much demand, not enough supply and econ 101 says that prices will rise.”
Imposing restrictions on apartment rents will change the underwriting assumptions of lenders in the state and might lead to a wave of defaults as assets are repriced, warned Costello. As lenders rethink how assets are financed in California, the crisis in housing will get worse, he predicts.
Clearly there will be other factors at play helping to push up cap rates, points out Costello. The increase RCA tracked is mostly focused on the more expensive markets in the U.S., where cap rates are structurally lower and as investors worry about how much cap rates will move up when interest rates do again rise someday, some of the repricing may be a function of investors unloading a portion of that rate uncertainty, Costello notes.
“Rather than try to fight market forces, the state would do better to use the market forces that have created so much prosperity for the state,” Costello says. “The state would be better served by removing restrictive zoning, streamlining permitting, and shutting down exclusionary policies thinly veiled as NIMBY opposition.”
For comments, questions or concerns, please contact Dennis Kaiser